How to Use a Mutual Fund to Pay Debt

by Bonnie Conrad

Paying off your debt is a smart move.

If you are carrying high-interest debt like a credit card balance, paying off that account gives you a guaranteed rate of of return. Paying off an 18 percent credit card balance is the equivalent of earning an 18 percent return on your money, something that would be impossible to do in any other way. If you have money in a mutual fund, you might want to sell that fund and use the money to pay off your debts.

Gather your bills and make a list of what you owe. Note the interest rates on each account and the total outstanding balance.

Focus on paying off the debt with the highest interest rate first. Paying that high-interest debt will maximize the return on your investment and minimize the impact on your overall portfolio.

Call your mutual fund company and direct that the capital gains and distributions be paid directly to you, rather than reinvested in additional shares. This will give you more current cash flow--cash flow you can dedicate to paying down your debt, and eventually eliminating it altogether.

Dedicate the profits you make in your mutual funds to debt payments. Watch your investments carefully and consider selling your winners and using the proceeds to eliminate your debt. Also use the proceeds from rebalancing your portfolio to reduce your debt load. You should rebalance your portfolio on an annual basis by selling appreciated assets and redeploying them elsewhere, but you can rebalance any time and use the funds to get rid of high interest debt.

Review your investment statements and make a list of each account and its rate of return. Identify the funds you need to sell to pay off the remainder of your debt. Selling the mutual fund with the lowest rate of return allows you to retire your debt with a minimal impact on your overall portfolio.

Contact the administrator of the mutual fund at the toll-free number listed on the statement. Tell the representative you wish to sell your shares, and indicate whether you want the proceeds sent to you in a check or transferred to your bank account.

Pay the balance of your debt with the proceeds from the mutual fund account. Be sure to keep copies of your sale confirmation for your records.